By Tiernan Ray

Shares of Gigamon (GIMO), which makes network monitoring equipment, are down $5.92, or 33%, at $12.26, after the company yesterday afternoon cut its June-ending Q2 outlook to a range of $34.5 million to $35 million from a prior range of $38 million to $42 million, citing challenges in closing deals.

The new forecast is below what had been analysts’ average estimate of $40.2 million before the announcement. Consensus has now been cut to $35.3 million.

In the statement, CEO Paul Hooper said the company was “disappointed” with the results, remarking that the company “experienced challenges with closing the deals in our pipeline during the later stages of the quarter, as we continued to see longer review and approval cycles.”

He said Gigamon “remain confident in our market opportunity.”

Gigamon plans to report full results on July 24th, after market close.

The stock has gotten five downgrades today, that I can see, from Goldman Sachs,William Blair,Needham & Co., Merrill Lynch, and DA Davidson., with three of them moving to the equivalent of a Hold rating, and one, Needham, trimming to just Buy versus Strong Buy, but Merrill advising a Sell on the stock.

William Blair’s Jason Ader, cutting the stock to Market Perform from Outperform, writes that he has “a lack of confidence in Gigamon management’s ability to predict the business” and an “increased concern that growth challenges in the visibility fabric market and competitive pressures may have led to the recent misses.”

“While we hate to downgrade the stock following such a miss, we note that material cuts to our Gigamon numbers and uncertainty on future growth and profitability make valuation alone a poor reason to stick with the story.”

Writes Ader, this miss doesn’t jibe with what management told the Street following the Q1 report, and so it’s hard to believe management at this point:

Following Gigamon’s first-quarter underperformance, management made multiple comments around the company’s lack of dependence on larger deals to make its quarterly targets and stated that its wider guidance range for the second quarter did not assume significant large deal revenue contribution. The magnitude of the second consecutive top- line miss brings management’s statements and credibility into question and suggests that competition from newcomers such as Arista and/or overall curtailed market growth may have also been a factor in the company’s underperformance.

Ader cut his 2014 estimates to $146.6 million and a 3-cent loss per share from what had been an estimate for $171.3 million and a 27-cent loss per share.

Goldman Sachs’s Ken Schofield cut the stock to Neutral from Buy, and cut his price target to $14 from $29, writing that he was wrong to recommend the stock at the end of January, and that the shares will “remain in the penalty box” while investors wait to see if the company can grow its business.

Schofield thinks it will be hard for Gigamon to get that growth given that he believes it can’t just be an execution issue that’s bedeviling the company.

That threat of other technologies will make it hard for the stock to see valuation multiple expansion, he believes.

On a more charitable note, perhaps, Needham’s Alex Henderson, cutting the stock to Buy from Strong Buy, slashes his target from $34 to $20, writing that he’’s now not sure he can take confidence in the way management has described its setbacks.

After the first pre-release, in our view management convincingly argued that the issue was isolated and as a result we upgraded to a Strong Buy after the 1Q pre-release. With the second pre-release in a row, we believe the idea that the 1Q miss was isolated becomes untenable. With no explanation offered for the second miss, we must assume there is a structural issue that is likely to take 2-4 quarters to fix. That said, we still think the stock is oversold at 1.5x EV/E on our sharply lowered calendar 2015 estimates.

Henderson holds out hope: “We expect management to get through this rocky period and re-establish growth.”

Howver, he cut his estimates for this year to $141.9 million and a 4-cent loss per share from a prior $177.9 million and 36 cents profit per share. For 2015, he cuts his numbers to $159.2 million and a 25-cent profit per share from a prior $223.9 million and 70 cents.

Add a Comment

We welcome thoughtful comments from readers. Please comply with our guidelines. Our blogs do not require the use of your real name.

Comment

There are 7 comments

JULY 9, 2014 3:27 P.M.

GIGOMAN DIKHEAD wrote:

Battered CEO should fired and director should put company on sale. This Graveyard CEO can not do any thing. I am doubtful whether he is qualified for job.

JULY 9, 2014 4:01 P.M.

Anonymous wrote:

Analysts saying "“a lack of confidence in Gigamon management’s ability to predict the business”" really means a lack of *any confidence in the management team.
And this quarters and last's of "“we remain confident in our market opportunity.”" means Hooper has no clue, or is being fed bad forecast data. The IPO was too soon, and was not designed for growth but rather for founders to grab a quick exit.

JULY 9, 2014 4:14 P.M.

igi wrote:

i still cant figure out what this company does, hardware with software to go on top of a hp or ibm server? ok... if it was such a great technology hp and ibm would be building servers with it

JULY 9, 2014 4:55 P.M.

@igi wrote:

Well, Mr Hoopers background says he was in Marketing for several years. If we can't understand what they make or do, because the messaging is that poort, what does that say to ability to run the other functions?

JULY 9, 2014 5:52 P.M.

Software Defined Future? wrote:

It looks like Ken Schofield is nailed it above in his assessment of competing forces stalling Gigamon's business. Seems like the industry or some of these "larger deals" may be holding out as Software Defined solutions continue maturing. They need to make a push toward developing an SDN offering to compliment it's distributed network/traffic visibility hardware...

JULY 9, 2014 5:57 P.M.

fuker ceo wrote:

stop giving guidance and announcement. . Analyst does not know any thing including Jacass. Upgrade @ 179 and now down grading after announcement. They making mill. for nothing. Stock down and now down grading.

JULY 10, 2014 4:31 P.M.

Jack wrote:

Goldman, Sachs & Co., BofA Merrill Lynch and Credit Suisse were lead underwriters for Gigamon IPO last year. They pumped GIMO first; now the Goldman Sachs analyst says he was “wrong” to recommend the stock. What a remorse.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.